Implications of announced Phase 2 National Allocation Plans for the EU ETS

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The authors quantified the volume of free
allowances that different national allocation plans proposed to
allocate to existing and new installations, with specific reference to
the power sector. Most countries continue to allocate based on historic
emissions, contrary to hopes for improved allocation methods, with
allocations to installations frequently based on 2005 emission data;
this may strengthen the belief in the private sector that emissions in
the coming years will influence their subsequent allowance allocation.
Allocations to new installations provide high and frequently
fuel-differentiated subsidies, risking significant distortions to
investment choices. Thus, in addition to supplying a long market in
aggregate, proposed allocation plans reveal continuing diverse
problems, including perverse incentives. To ensure the effectiveness of
the EU ETS in the future, the private sector will need to be shown
credible evidence that free allowance allocation will be drastically
reduced post-2012, or that these problems will be addressed in some
other way.